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Johnson Electronics is considering extending trade credit to some customers previously considered poor risks

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks
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FINANCE

FIN 200
Axia College of University of Phoenix (UoP)

Foundations of Financial Management
Block Hirt Danielsen

Introduction to Finance: Harvesting the Money Tree
Fin 200 Week Solution
Chapter 7

16. Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales will increase by $100,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79 percent of sales. The firm is in the 40 percent tax bracket.
a. Compute the incremental income after taxes.
b. What will Johnson’s incremental return on sales be if these new credit customers are accepted?
c. If the receivable turnover ratio is 6 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be?

 

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